History of the Broadcast License

Final Report

History of the Broadcast License

Application Process

Prepared for the FCC as a deliverable for the study of “Estimation of Utilization Rates/Probabilities of Obtaining Broadcast Licenses from the FCC”

prepared by

KPMG LLP

Economic Consulting Services

For

Federal Communications Commission

November, 2000

1

Table of Contents

I.Introduction

II.Communications Act of 1934 and Early Comparative Hearings

III.1965 Policy Statement on Comparative Broadcast Hearings

Financial Requirements......

IV.Minority and Female Employment and Ownership Policies

A.Nondiscrimination Employee Practices of Broadcast Licensees......

B.Pre-1978 Ownership Policies......

1.Mid-Florida Television Corp.

2.Rosemore

3.Atlas Communications

C. 1978 Statement of Policy on Minority Ownership......

D.Gender Ownership Policies......

1. Gainesville Media, Inc.

2.Steele

3.Lamprecht

V.Elimination of Comparative Hearing Process

A.Bechtel

VI. Broadcast Services

A.AM Radio......

B.FM Radio......

C.Television Stations......

D. Differences between AM, FM and TV......

VII.Evolution of Ownership Rules

VIII.Recent Developments

IX. Conclusion

I. Introduction

This paper presents a history of the process by which applicants for broadcast licenses have been awarded licenses directly by the Federal Communications Commission (“FCC”). The paper has been prepared as a deliverable for the Study of Estimation of Utilization Rates/Probabilities of Obtaining Broadcast Licenses from the FCC (the “Comparative Hearing Study”). The Study will assist the FCC in implementing Section 257 of the Telecommunications Act of 1996 (“1996 Act”)[1] and Section 309(j) of the Communications Act of 1934 (“1934 Act”).[2] Section 257 of the 1996 Act mandates that the FCC identify and eliminate market entry barriers for small telecommunications businesses. Further, Section 309(j) of the 1934 Act requires the FCC to further opportunities in the allocation of spectrum based services for small businesses and businesses owned by women and minorities. The Comparative Hearing Study will help the FCC in examining whether there is evidence of past discrimination in the process by which broadcast licenses have been awarded by the FCC.

One area of analysis for the study will focus on the FCC policies stated in this paper and determine how these policies may have impacted the outcomes of the licensing process. This paper is important in that it provides a backdrop for understanding how FCC policies may have affected small and women- and minority-owned businesses.

The paper is organized as follows. Section II describes the 1934 Act and early comparative hearings. Section III discusses the Policy Statement on Broadcast Comparative Hearings, 1 F.C.C.2d 393 (1965) (hereinafter 1965 Policy Statement). The 1965 Policy Statement was the first major official FCC statement that outlined many of the criteria that would be applied by the FCC during the consideration of multiple applications for a single broadcast license. Section IV addresses the factors that brought the elimination of comparative hearings. Section V discusses broadcast services. Section VI describes the evolution of the FCC’s ownership rules. These rules have changed substantially since the early 1940s in order to reflect the views of Congress and the Judiciary about how much concentration should be tolerated in local and national broadcast markets. Section VII describes the chronology of FCC minority and gender based ownership and employment policies. These policies were developed by the FCC in order to carry out that part of its mission as determined by Section 257[3]of the Telecommunications Act of 1996 and section 309(j)[4]of the 1934 Act. This Section also provides a brief summary of recent developments as they relate to gender and race-based policies. Section VIII provides a summary to this paper.

II.Communications Act of 1934 and Early Comparative Hearings

The FCC was created by the Communications Act of 1934 (the “Act”).[5] The Act granted the FCC the authority to regulate “communications by wire and radio so as to make available to all the people of the United States a rapid, efficient, nation-wide, and worldwide wire and radio communication service.” This Act also empowers the FCC to issue broadcasting licenses “as public convenience, interest, and necessity requires.”[6]

One landmark court case that was resolved in 1945 reinforced the importance of the comparative hearing process in awarding a broadcast license when there are multiple applicants. In Ashbacker Radio Corp. v. FCC, 326 U.S. 327 (1945), the Supreme Court of the United States held that:

Where the Federal Communications Commission has before it two applications for broadcasting permits which are mutually exclusive, it may not, in view of the provisions of the Act for a hearing where an application is not granted upon examination, exercise its statutory authority to grant an application upon examination without a hearing.

This decision set the legal precedent that a publicly distributed license must be assigned through a process that does not exclude competition for the license. The process of comparative hearings, therefore, was upheld.

A comparative hearing was necessary when more than one applicant applied for the same broadcast license. In the event of multiple applicants, the FCC would hold a comparative hearing, a proceeding that was presided over by an Administrative Law Judge (ALJ). The purpose of the comparative hearing was to determine which applicant for a broadcast license is best qualified to hold the license.

The rest of this section briefly describes the process to acquire a new station license as it is related to the comparative hearing process and the concept of “best qualified” applicant.

The FCC took several miscellaneous factors into consideration in the pre-1965 comparative hearings. The factors that the Commission has favored are "(1) local residency of the owners, who are expected to be thoroughly conversant with local needs, (2) integration of ownership and management, whereby the owners will take an active part in the daytoday operation of the station, (3) active participation by applicants in civic affairs, (4) broad diversification of background and interests, and (5) past broadcast experience."[7]

While diversification of control was never an officially stated objective prior to 1965, the FCC mentioned it in the Federal Register in 1944[8]. Early on, the FCC was sensitive to the danger and abuse that could result from one organization owning a concentration of media interests and so the FCC disfavored applicants who would gain a "monopoly" in a particular region. Media interests were not limited to broadcast media, rather, they could include newspaper or other media outlets. Although not common, there were cases that were decided on the basis of diversification.[9] As will be discussed later in this paper, in 1965[10] the FCC made diversification a "factor of primary significance" in the comparative hearing process.

In sum, in the early years of the comparative hearing process, the FCC began to interpret the standard of "public interest, convenience or necessity" in the distribution of broadcast licenses. These early interpretations developed as trends in the licensing process and were eventually upheld by decisions, and, as will be discussed later, were finally codified in 1965.

III.1965 Policy Statement on Comparative Broadcast Hearings

Until 1965, comparative hearings proceeded on the premise that the winning applicant should prove to best serve the public interest, convenience, or necessity out of all of the applicants. These criteria were too broad however and left many issues undecided. Realizing this, the Commission issued the 1965 Policy Statement. This statement defined the "two primary objectives toward which the process of comparison should be directed. They are, first, the best practicable service to the public, and, second, a maximum diffusion of control of the media of mass communications." While trying to avoid attaching absolute values to each criterion, the Commission provided guidance on seven areas on which a comparative hearing could be decided.

1.Diversification of control of the media of mass communications.

2.Full-time participation in station operation by owners.

3.Proposed program service.

4.Past broadcast record.

5.Efficient use of frequency.

6.Character.

7.Other factors.

Each of these seven factors will be discussed below.

1. The FCC treated diversification of control of the media of mass communication as a factor of primary importance in the comparative hearing process. If an applicant had controlling interests in other media of mass communications then there was the potential for this factor to reduce the probability that this applicant would be awarded a license.

How much the probability of success was reduced by this factor depended upon:

a) the size of the applicant’s other media holdings;

b) the proximity of these holdings to the community associated with the contested license;

c) the degree to which these other holdings were regional or national; and

d) the quantity and quality of competing media outlets in the localities associated with the applicant’s current holdings.

This factor was of such significance that the details of the rules and how they have changed over the years are worth describing (see section IV).

1. The FCC treated the degree of full time participation in station operation as of substantial importance in the comparative hearing process. An applicant would receive no credit for this factor unless he/she could demonstrate some form of daily participation in the operation of the station. Credit would be given if the applicant could demonstrate that he/she would be in a position of influence in the daily operation of the station (e.g. general manager, station manager, program director). Credit would also be received if the applicant could show local residency and/or civic participation. Finally, the applicant could receive limited credit if he/she proposed to move to the locality associated with the station or if the applicant could demonstrate some experience with the community even if they were not to be involved in the day-to-day operations of the station.

1. Proposed program service was an additional factor considered by the FCC in the comparative hearing process after 1965. Applicants had to demonstrate that their program proposals were designed to meet a public need. Superior devotion to public service and local matters was looked upon favorably. This factor was only relevant when there were significant differences between the program services of competing applicants.

1. The FCC considered previous broadcast experience as substantially important. This factor had the potential to add to or subtract from an applications probability of success. Unusual attentiveness to public needs and interests would improve the chance of a successful application while obvious inattention to public needs and interests would reduce the chances of success. This factor was usually only relevant for applicants with unusually good or unusually poor past performance records.

1. Efficient use of frequency was a factor established to capture variation in the technical characteristics of each application. Namely, the Commission was interested in the number of people who lived within the proposed station’s service area. This factor was typically evaluated on a case by case basis. It was especially relevant for services in which technical processes are less regimented (e.g. AM radio).

The 1965 Policy Statement introduced applicant character as a relevant consideration in the comparative hearing process. Character deficiencies associated with an applicant may be cited as grounds for disqualification.

The FCC has scrutinized existing and potential licensees on the basis of "character." Up until 1985, the term "character" was often interpreted as moral character and character inquiries often followed the same interpretation. In 1981, the Commission issued a notice of inquiry which discussed the standardization of policies regarding character issues which was later described as an effort to "eliminat[e] . . . the morally-tinged decision-making of the past." On January 14, 1986, the FCC issued a policy statement on character[11] that outlined which character issues should be considered and how those issues should be investigated. Those actions to be considered include the following:

a)Fraudulent misconduct before a government agency;

b)Criminal convictions; Antitrust and anticompetitive commercial practices;

c)Violations of the Communications Act, Commission FCC rules and policies;

d)Misrepresentation or lack of candor to the commission & abuse of process;

e)Deceptive or fraudulent programming;

f)Misconduct by corporate applicants;

g)Employee misconduct; and

h)Misconduct in parent-subsidiary relationships and related subsidiary.

While the range and scope of the character policy remained relatively large, in practice, character issues generally amounted to one opponent showing another opponent's lack of candor to the Commission regarding finances, business dealings, or proposed station arrangements. Eventually, character issues were eliminated as a comparative criterion but were kept as a basic requirement.

1. The FCC also allowed for an "other" category. This category allowed applicants, via a petition or motion to enlarge issues, and to submit other evidence they felt should be significant in the decision making process. The applicant submitting this additional information was required to demonstrate the relevance of the information. The practice of enlarging issues became widespread enough where, at one time, the Commission designated a separate board to hear and rule on these petitions. Ultimately, though, this responsibility was returned to the Administrative Law Judges.

Financial Requirements

While the 1965 Policy Statement did not explicitly address the financial requirements of applicants, this was a central issue in a 1965 Memorandum of Opinion and Order issued by the FCC. The Commission assigned a panel of three commissioners to review the financial issues involved in three cases related to applications for UHF television stations in Buffalo, Cleveland, and Boston. In each community, three commercial VHF stations were in operation, and the question arose as to whether a higher standard should be applied in determining the financial qualifications. The panel concluded that each applicant should be required to project estimated annual revenues over a three- year period and to establish, by evidentiary proof, the basis for such estimates. A majority of the panel further concluded that a realistic estimate of construction costs and operating expenses were also essential and required that each applicant disclose all factors which were considered in computing such costs and expenses. On June 30, 1965, the Commission adopted the following rules governing financial requirement for applicants for proposed stations:

(a) The Commission had to determine the basis of each applicant's (1) estimated construction costs, and (2) estimated operating expenses for the first year of operation.

(b) In the event that the applicant depended upon operating revenues during the first year of operation to meet fixed costs and operating expenses, the Commission had to determine the basis of each such applicant's estimated revenues for the first year of operation.

(c) The Commission had to determine, in light of the evidence, which of the applicants, if any, demonstrated a reasonable likelihood of constructing and continuing the operation of its proposed station in the public interest.

IV.Minority and Female Employment and Ownership Policies

Starting in the 1960s, the FCC has paid close attention to race and gender issues as they relate to broadcasting and the award of broadcast licenses. In this section, we describe the chronology of the FCC’s minority and female ownership policies, from their rise in the 1960s and 1970s to their reevaluation in the 1990s. The logic for these programs is best expressed in various court cases and FCC policy statements. Therefore we cite below the most important cases and policy statements affecting the award of credit for minority and female participation in the determination of license awards in the comparative hearing process.

A.Nondiscrimination Employee Practices of Broadcast Licensees

The first time the FCC directly addressed the issue of race in a formal policy ruling was in its 1969 policy forbidding discrimination on the basis of race, color, religion, or national origin in employment practice by licensees of commercial or noncommercial broadcast stations (18 F.C.C.2d 240; 1969 FCC LEXIS 547; 16 Rad. Reg. 2d (P & F) 1561). The Commission asserted its authority in this area by noting that the FCC is charged with ensuring that broadcast stations operate within the public interest and broadcast stations that have discriminatory employment practices do not operate within the public interest. To ensure equal opportunity in every aspect of employment opportunity, each broadcast station was directed to establish a proactive equal employment opportunity program. The FCC reserved the right to act against any broadcast station that violated this policy. This established the Commission's right to, among other actions, revoke licensees and distribute them by distress sales and to hear allegations of EEO violations in comparative hearings. While these actions presented themselves on very rare occasions, and such occasions were restricted to actual findings of discrimination by a court or the EEOC, this policy was seen as a significant gender and race based policy.

However, the U.S. Court of Appeals for the District of Columbia Circuit, in a decision issued in April 1998 (Lutheran Church - Missouri Synod v. FCC), held that certain provisions of the FCC's broadcast equal employment opportunity rules were unconstitutional. That fall, the U.S. Court of Appeals denied the FCC’s request for a rehearing of its decision. Thereafter, on November 19, 1998, the Commission adopted a notice of proposed rulemaking (NPRM) outlining new rules to further equal employment opportunity in Broadcasting in a manner that is consistent with the court’s decision.

B.Pre-1978 Ownership Policies

1.Mid-Florida Television Corp.

While the FCC monitored for discrimination on the basis of race in the employment practices of broadcast stations, initially the FCC refused to include the racial composition of an applicant group as a relevant factor in a comparative hearing. This position was initially challenged in 1965 by the Comint Corp applicant group in the comparative hearing for a TV broadcast license in Orlando, Florida.

In 1965, the D.C. Court of Appeals vacated the decision that awarded the TV license to Mid Florida Corp. and opened the license to competition. Eight applicants filed for ownership and the matter went to comparative hearing. In the comparative hearing, one of the applicants, Comint Corp., filed an application which included two black owners with a 14% shared interest. The proposed community for the license awarded had a 25% minority population. Comint argued that minority ownership should be given comparative credit on the basis of the 1965 statement on comparative hearings (1 F.C.C.2d 393 (1965)) which stated that the "two primary objectives toward which the process of comparison . . . are . . . the best practicable service to the public, and . . . a maximum diffusion of control of the media of mass communications." The FCC noted that while it: